Tag: policy

“Republicans’ “big, beautiful bill” includes a gift to millions of families: $1,000 in an investment account for every eligible newborn.

The new savings vehicles, akin to Individual Retirement Accounts, are designated for children who are U.S. citizens born from 2025 through 2028. In addition to the one-time government contribution, parents and others can chip in as much as $5,000 a year to the accounts, which beneficiaries can access at 18, with some constraints.

The seed money is a boon for recipients and will grow tax-deferred. Financial planners say parents and guardians might do better putting their money into existing investment vehicles such as a 529 plan, a savings plan designed to cover college expenses. But 529s are limited to education, while backers say the new accounts can help their recipients beyond college.

Republican lawmakers call the accounts “Trump accounts,” though the Senate’s plan to officially name them after the president did not make it to the final version of the legislation, which was signed Friday. They deliver on an idea that both Democrats and Republicans have floated for years: to invest money for all children at birth.

Withdrawals from a 529 are not subject to state or federal taxes as long as the funds go toward qualified education expenses – a feature the new investment accounts don’t share. And in the new accounts, parents’ deposits don’t qualify for a tax deduction, notes Greg Leiserson, a senior fellow at the Tax Law Center at New York University. “You have this very slight or minimal-to-nonexistent tax benefit,” he said. “What is the point here?”

Financial adviser Amy Spalding of Chapel Hill, North Carolina, said she will continue to steer her clients to 529s. “It’s better from a tax standpoint,” Spalding said. “And there are more investment options. And then there’s a higher contribution limit.” (For 2025, a single person can deposit as much as $19,000 a year into a beneficiary’s 529, while married couples can contribute as much $38,000.)

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withdrawals will be taxed at typical income rates, not at the capital gains rate of a taxable brokerage account. “For most people, this is going to be worse than what they could do in a taxable account,” he said.

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The law requires the new investment accounts to track a U.S. stock index

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“If you’re saying, ‘Okay, I’m going to start school in the fall’ – if the market falls over the summer, the planning you were doing about how you were going to pay for college is totally messed up, because the money you thought would be there, isn’t.”

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account holders cannot touch the funds until they turn 18. After that, the rules are the same as those of an individual retirement account – withdrawals are taxed like income, plus an additional 10 percent tax penalty on any withdrawals before age 59½ except for certain qualified uses.

Those uses include paying for college, supporting themselves if they become disabled, or recovering from domestic abuse or a natural disaster. Beneficiaries also can withdraw as much as $10,000 to buy their first home, and up to $5,000 when they have a new baby themselves.

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Even one of the Trump accounts’ biggest proponents in Congress, Rep. Blake Moore (R-Utah), said in an interview that for many parents, the new account design offers more benefits for retirement than for college expenses.”

https://finance.yahoo.com/news/kid-getting-trump-account-put-182354610.html